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Gold jumps above $2,450 as Fed looks set to cut interest rates in September

  • Gold price gains above $2,450 as traders widely anticipated the Fed will begin reducing interest rates from September.
  • The US CPI data for July boosted confidence that price pressures will return to the desired rate of 2%.
  • Investors await the US monthly Retail Sales data for July.

Gold price (XAU/USD) rises above $2,450 in Thursday’s European session. The precious metal gains ground as investors seem to be increasingly confident that the restrictive monetary policy stance by the Federal Reserve (Fed), maintained for more than two years, will start to be unwound in September. 

The United States (US) Consumer Price Index (CPI) report for July, released on Wednesday, added to evidence that price growth is on track to return to the desired rate of 2%. Annual headline inflation decelerated to 2.9% from expectations and June’s reading of 3%. In the same period, the core CPI, which excludes volatile food and energy prices, grew by 3.2% as expected, down from the prior release of 3.3%. 

Firm speculation for Fed interest-rate cuts in September has limited the upside for both the US Dollar (USD) and bond yields. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, exhibits a subdued performance and trades slightly above a seven-month low of 102.16. 10-year US Treasury yields move higher to near 3.84% but remain close to weekly lows. 

Usually, lower yields on interest-bearing assets bode well for non-yielding assets such as Gold, given that they reduce the opportunity cost of holding an investment in them.

Daily digest market movers: Gold’s next move could be driven by US Retail Sales

  • Gold price climbs above $2,450 in Thursday’s European trading hours but struggles to break above all-time highs of $2,483.70. The upside in the Gold price appears to be limited as traders are scaling back bets that the Fed will reduce interest rates aggressively in September.
  • According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that traders see a 37.5% chance that interest rates will be reduced by 50 basis points (bps) in September, down significantly from the 55% recorded a week ago.
  • Though the CPI report showed that price pressures eased on year, month-on-month headline and core inflation rose by 0.2% as expected. The rise, which was driven mainly by higher rentals and prices of transportation services,  dampened speculation for Fed big rate cuts ahead.
  • However, Atlanta Fed Bank President Raphael Bostic appeared comfortable with a 50 bps interest-rate reduction if the labor market weakens further, he said in an interview with the Financial Times (FT) on Wednesday. Bostic added that he is open to interest rate cuts in September and warned that the Fed can’t “afford to be late” to ease monetary policy, Reuters reported.
  • Going forward, the next trigger for the FX domain will be the US monthly Retail Sales data for July, which will be published at 12:30 GMT. Retail Sales are expected to have grown by 0.3% after remaining flat in June.

Technical Forecast: Gold price oscillates inside channel formation

Gold price trades in a channel formation on a daily time frame, which is slightly rising but has been broadly moving sideways for more than three months. The 50-day Exponential Moving Average (EMA) near $2,390 continues to provide support to the Gold price bulls. 

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among market participants.

A fresh upside move would appear if the Gold price breaks above its all-time high of $2,483.75, sending it into unchartered territory.

On the downside, the upward-sloping trendline at $2,225, plotted from the October 6, 2023, low near $1,810.50, will be a major support in the longer term.

Gold FAQs

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.